Chapter 16 Interest Rates and Monetary Policy Quiz
As part of its zero interest rate policy (ZIRP), the Federal Reserve:
used open-market operations to keep the federal funds rate between zero and 0.25 percent.
If, in the market for money, the quantity of money demanded exceeds the money supply, the interest rate will:
rise, causing households and businesses to hold less money.
In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the:
cyclical asymmetry of monetary policy.
The four main tools of monetary policy are:
the discount rate, the reserve ratio, interest on reserves, and open-market operations.
Answer the question on the basis of the following table: Interest Rate 2% 4% 6% 8% 10% Transaction Demand for Money $220 220 220 220 220 Asset Demand for Money $300 280 260 240 220 Money Supply 460 460 460 460 460 At equilibrium in the given market for money, the total amount of money demanded is:
$460
Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. Which of the following would shift the money supply curve from MS1 to MS3?
Purchases of U.S. securities by the Fed in the open market.
Which of the following is correct?
The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by:
a downsloping line or curve from left to right.
Federal Reserve Notes in circulation are:
a liability as viewed by the Federal Reserve Banks.
If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:
buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.
To reduce the federal funds rate, the Fed can:
buy government bonds from the public.
Other things equal, which of the following would increase the federal funds rate?
A decline in excess reserves in the banking system.
If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy?
Buy bonds in the open market.
Refer to the given market-for-money diagrams. The total demand for money is shown by:
D3.
The transactions demand for money is most closely related to money functioning as a:
medium of exchange
According to the Taylor rule, if inflation has risen by 6 percentage points above its target of 2 percent, the Fed should:
raise the real federal funds rate by 3 percentage points.
Answer the question on the basis of the information in the following table. Money Supply / Money Demand $400 / $600 400 / 500 400 / 400 400 / 300 400 / 200 Interest Rate Investment 2% $700 3% $600 4% $500 5% $300 6% $200 Refer to the table. An interest rate of 2 percent is not sustainable because:
the supply of bonds in the bond market will rise and the interest rate will rise.
Answer the question on the basis of the following consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions and each question should be answered independently of changes specified in all preceding ones. Assets Reserves: $200 Securities: $300 Loans: 500 Property: 400 Liabilities & Net Worth Checkable Deposits: $1,000 Stock Shares: $400
10 percent
If the Fed wants to discourage commercial bank lending, it will:
increase the interest paid on reserves held at the Fed.
Refer to the diagram for the federal funds market. If the Fed wants the federal funds rate to fall from if1 to if2, it can use open-market operations to:
increase the supply of federal funds.